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I linked a Youtube presentation a couple of days ago by a professor who explained the exponent thing.  It was dry and I bet nobody went and watched the whole series; it was basically an hour long.

Yet if you don't understand this, you understand nothing when it comes to economics and the lies told by both the left and right.  You are not stupid, however: you are ignorant.

That ignorance is intentional.  Our "educational system", our bankers and our politicians intentionally fail to explain the fundamental concept explained in this Ticker for one and only one reason: Once you understand it - truly understand it - you can never fall victim to a ponzi scheme.  Not only that, you will never allow any society you are a member of to fall victim to one either, as you will recognize the inherent danger and demand that they be stopped and the people responsible either locked up or burned at the stake (after a proper trial, of course.)

Ignorance falls to education.  It is why we learn, hopefully, so we become less-ignorant.  As such I was prodded in email this morning by someone who said "you get this well for a non-scientist" and I had to reply in riposte: Ah, but I am a scientist you see....

Anyway, here we go.... pull yourself a nice Espresso and sit down for a short story that will explain why we're utterly screwed if we don't act and why acting to stop the progression of what is going in our economy right now is not an option - it is an imperative.

There happens to be a particular species of pond lily that is extremely prolific.  In fact it grows so fast that it doubles in size through both growth and reproduction in just one day.

We will start with a pond of a surface area of 4096 square feet, or about 64 feet square.  We will place within that pond one lily with an area of of one square foot; that is, a lily that is a square of 12 x 12".

This pond contains fish, which would like to live in symbiosis with the algae and other growing plant material within the pond.  In order to do some part of the pond's surface must be exposed to the air so that oxygen and carbon dioxide can be exchanged, and some part of the pond's surface must be open to the sun, or the algae that make up a good part of the food the fish eat (we will assume they do not eat the lilies directly) can survive.  The lilies will conveniently consume the urea (nitrogen) that the fish excrete, preventing the pond water from becoming poisonous.  So long as this symbiosis is maintained all is fine.  But if this symbiotic relationship fails all the fish will die.

We are the fish, incidentally, and the lilies are debt.

Now here's the question: Will the fish inevitably die and if so how long, in days, will pass before they perish?

That's easy.

On the first day there is 1 square foot of pond that is covered.
On the second, 2
On the third, 4.
On the fourth, 8.
On the fifth, 16.
On the sixth, 32.

Note that on the 6th day just 0.8% of the pond is covered with lilies.  You would not detect any problem on the sixth day, I suspect.  More than 99% of the pond is open to the sky!

Now here's the nasty truth: If you're a fish you're halfway to being dead!

Wide awake yet?  I hope so; let's continue.

On the seventh day 64 square feet are covered.
On the eighth, 128.
On the ninth, 256.
On the tenth, 512.

The pond is now 12.5% covered.  More than 80% of the surface area is open to the sky.  When you hear someone say "we have 80% of our resource left; we can't be in trouble", consider exactly where you are.  Why?  You'll see in a moment....

On the eleventh day, 1024 square feet are covered.
On the twelfth, 2048.
On the thirteenth day there is no surface open to the sky and every fish in the pond dies.

When did you figure out you're in trouble?  Was it on the twelfth day?  Well if so you had literally less than 24 hours to commit mass lilicide or you're all dead!  You literally can't spend one day debating with your fellow fish even though you still have half the surface area open to the sky on that 11th day.

This is the nature of exponents folks.

When it comes to economics we need to consider what the doubling time is to figure out how soon our situation will get intolerably bad.  Math provides us the answer; we can use the natural logarithm to determine time, but most people's eyes fuzz at the beginning of the discussion of "e" and thus I won't explain it that way (those of you who were awake in high school and college math, however, should be perking up right about now.)

Years ago, long before calculators, bankers reduced the use of logarithms to a "rule" called "The Rule of 72."  Simply you can take the growth rate of anything and divide that into 72 to find the approximate doubling time.  So if we have debt growing at 7% a year in the economy we can divide it into 72 and find that it takes about 10 years for the debt in the system to double.  This is an approximation, but it's close enough to do in your head (72 is a convenient number for mental division as it is divisible by both 12 and 6 and 6 of course factors to 2 and 3, so most common multiples can be quickly figured in your head without pencil and paper.)

Now go back and read the lily example again, and remember that when you're one period away from being extinct half of the available resource, in this case the money you earn to pay interest and/or principal on your debt, remains available to you!

Yet even with a fifty percent current economic (in this case) surplus you're just one period away from certain destruction!

Do you see the problem more-clearly now?

All the so-called "economists" (cough-Krugman-cough!) and the various commentators both in the mainstream media and blogosphere either do not understand this or simply refuse to accept and discuss it. 

But it doesn't matter whether you choose to accept that you're inevitably doomed in three days when the pond is 12.5% covered with lilies.  You see blue sky and breathe easily, yet you are literally three days away from certain extinction and your refusal to accept mathematics cannot change what is about to happen to you!  You either start killing lillies FAST or you're dead!

These are facts folks.  They are governed by natural laws that are fixed and cannot be avoided.  I cannot change them, you cannot change them, Barack Obama cannot change them, the Republicans cannot change them.  Nobody can change them.

These facts are why this chart happened:

and why, if we don't cut that crap out right now, we are screwed with absolute certainty.

The willful refusal of politicians and financial types, the latter of whom absolutely know this and the former who have no excuse for not understanding it, to discuss this point clearly when it comes to all matters in the economy is why I wrote Leverage.

We cannot avoid the mathematical facts or their effects.  Unlike the laws of man that can be evaded through bribery and trickery mathematics cannot be. 

You either accept these facts or you suffer the consequences.

One final point and I will leave you to think this over: The World Economic Forum (WEF) said recently that for us to achieve a 3% GDP growth for the next decade we would have to double the total systemic debt.  That is a roughly 7% annual growth rate in debt, or a "spread" of about 4% over "growth".  In order to do this, the amount of earnings from everyone in the economy that will have to be diverted to interest payments will also have to approximately double.  Yet it is the inability to pay that interest (and principal where it is paid down) that is factually known as the trigger for the 2007/08 financial collapse and this growth in debt, at their assumed 3% growth rate in GDP, will produce only a 34% increase in output with which you must pay for that doubling!

We must accept what we have done.

The fact is that if the pond will be covered entirely with lilies on October 31st it is now October 30th.

We have two choices: We either start killing lilies and find a way to keep them from reproducing, even though it appears we have half of our pond still uncovered and all is fine, or we will all perish with certainty.

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Ok, if you've listened to Pickens and the Ratigan show, you know that they seem to think that we can fix things with natural gas and perhaps with some renewables.

That will never work.  Nor will drilling here - we can replace some of our demand, but not all of it.  Further, the amount of oil we have is finite.

Indeed, all of the various energy resources are finite.  Even The Sun is finite.  It will eventually run out of fuel and "die."  It just won't happen for a very, very long time.

We have about ten years of natural gas supplies in proved reserves at present rates of consumption.  But "growth" is a nasty thing; it's a compound function, and I discuss this often - compound functions cause trouble, and usually quickly.

Pickens wants to move trucks (at minimum) to natural gas.  Nice sentiment.  But he's talking his book and pushing something that, if we double our consumption - and if we replaced gasoline and diesel we would - the "solution" would only last five years, make him filthy rich, and still leave us screwed.

There has to be a better way.  We need a solution that will last at least fifty years.

What if I told you that there is one?

It's coal.

But not how you think of coal.

We think of coal as going into a power plant that makes electricity.  But that's wasteful, believe it or not.

Here's the math on gasoline, diesel and coal.

1 lb of gasoline contains about 2.2 x 10^7 Joules of energy.
1 lb of coal contains about 1.1 x 10^7 Joules of energy.

These are reasonably-comparable; another way to look at this is that you need about 200% of coal (in pounds) as you do in gasoline for the same energy content.

Edit: Numbers vary on coal depending on type.  Changed to reflect the most-pessimistic reasonable observed number - 4/1 1:44 pm

We currently consume 378 million gallons of gasoline a day.  At 6lbs/gallon (approximately) this is 2,268 million pounds.  Reduced to short tons (2,000 lbs) this is 1.134 million short tons of gasoline/day, or 414 million short tons a year.  Converted to coal, this is 828 short tons.

The most-current value I can find for distillate (diesel fuel) is 3.794 million barrels a day.  At 42 gallons to the barrel, this is 159 million gallons of diesel fuel.  Diesel contains about 20% more BTUs per gallon than gasoline, but is about 17% heavier at 7lbs/gallon, so if we convert simply based on weight we get close.  So we have 1,113 million pounds of diesel daily; reduced to short tons that's 0.557 million short tons of diesel daily, or 203 million short tons a year.  Converted to coal, this is 406 million short tons.

Add these two and we get 1,234 million short tons a year of coal equivalent.

Why is this important?

Because according to the EIA, again, we consume about 1,073 million short tons of coal a year, virtually all of it being burned to produce electrical power.

How much coal do we have?  According to the EIA the total reserve base - the reasonable commercially recoverable coal, is about 489 billion short tons.  That's roughly four hundred years worth of supply at current rates of use.  If we assume our population will grow at about 1% a year and per-capita energy use remains roughly constant, we should have enough coal to last at least 200 years.

Now stay with me a minute.

Remember, we consume about that amount in coal-equivalent between both gasoline and diesel.

Consider this: There is 13 times as much energy in coal in the form of Thorium as there is available by burning the coal, and right now we literally throw it away in the ash pile!

What is Thorium?  It's a fertile material.  That means that when struck by a neutron in a reactor it transmutes via a nuclear process to an element that is capable of fission.  Note that Thorium itself is not fissionable - that is, it will not (directly) split and release energy.  Instead it captures thermal neutrons and turns into Uranium-233.  U-233 is fissile.

There is a type of nuclear reactor that utilizes this fuel cycle.  Instead of the traditional nuclear reactor which uses water as a moderator and coolant (either a boiling or pressurized water reactor) these reactors use a liquid salt.  In the vernacular they're called "LFTR"s, pronounced "Lifter." 

You've probably never heard of them.  But they're not pie in the sky dreams.  Our nation ran one for nearly four years in the 1960s at the Oak Ridge National Laboratory.  It was scrapped in favor of the traditional uranium fuel cycle we use today because the fuel it produces is very difficult to exploit for nuclear weapons, and it breeds fuel at a slow rate.  The natural process of the nuclear reactions in the core of such a unit produces a byproduct that is a very strong gamma emitter that is difficult to separate from the other reaction products.  For this reason - and because we wanted both nuclear power and nuclear weapons - we built the infrastructure for uranium and plutonium rather than thorium.

Thorium-based reactors have several significant advantages and a few disadvantages.  We have much less experience with LFTRs than traditional nuclear power, simply because we stopped working with them for political and war-fighting reasons.  They use a fluoride salt which is quite reactive when in contact with water, but the reactivity is a bonus in all other respects, because it tends to encapsulate the reaction products (the nasty fission products that you don't want in the environment) through that same chemical process.  It runs at a much higher temperature (typically 650C) than a traditional reactor and unlike a traditional reactor the fuel and the working fluid is the same - there are no fuel rods that can melt and release their nasty fission product elements, as the fuel is dispersed in the coolant.

Finally, the unit is intrinsically safe.  It does not require high pressure; the working fluid and coolant is a liquid at ordinary atmospheric pressure.  This gets rid of the need for high-pressure pumps, pipes and similar materials.  Without the moderator the reactivity is insufficient to sustain a chain reaction, and the moderator is in the reactor vessel itself through which the fuel/coolant is pumped, so criticality is impossible outside of the reactor vessel and inside the vessel the fuel and coolant are the same, and a liquid.  The working fluid is contained in the reactor loop by an actively-cooled plug.  If power is lost cooling ceases and the plug melts; the working fluid then drains into tanks by gravity under the reactor and cools into a solid, as it cannot maintain criticality outside of the reactor itself (there's no moderator in the tank or the plumbing.)  As the fuel is in the fluid, there is no core to melt as occurred in Japan and being dispersed over a much larger area the working fluid naturally cools from liquid to solid without forced pumping and cooling.  This safety feature was regularly tested in the unit at Oak Ridge - they literally turned off the power on the weekends and simply went home!

There are some downsides.  The working fluid requires special metals made out of Hastelloy.  But these are no longer particularly-special materials, being used in other chemical plants where highly-corrosive material is commonly handled.  They are expensive, but then again so are traditional reactor pressure vessels which require high-pressure integrity and thus special welding and inspection techniques.

Why did I just spend all this time talking about LFTRs?

Let's remember two facts from up above:

  • There is 13 times as much energy in coal in the form of Thorium as there is available by burning the coal.


  • We use 1,234 million short tons a year of coal equivalent in gasoline and diesel fuel which is approximately - within 20% - of the amount of coal we burn now.

One final piece of information: The Germans figured out how to turn coal into synfuel - gasoline and diesel - before WWII.  This process, called Fischer-Tropsch, requires energy to drive it and is currently in commercial use in some places that have a lot of coal but little or no oil, such as South Africa.  Malaysia also has an operating plant.  Typical operating temperatures for this process are in the neighborhood of ~350C.

This light bulb should be coming on about now: We can replace our gasoline and diesel consumption, plus replace the coal-fired plant electrical generation, and have lots of energy left over - all while completely eliminating the requirement for foreign petroleum from anyone!

Now let's put the pieces together.

We'll start with the same amount of coal we burn today.

We have the fuel energy in the coal, and we have 13x that much energy which we are going to extract from it in the form of the thorium naturally contained in the coal.

Let us assume we consume twice the fuel content of the coal extracting the thorium.  We have 11x the original energy left (once in combustion of the coal, and 10x in thorium energy content.)

We will then use the Fischer-Tropsch process to turn the coal into synfuel - gasoline and diesel.  We will be rather piggish about efficiency (that is, presume we're not efficient at all) and assume we put in twice as much energy as the coal contains in fuel content converting it.  Since the process heat from the reactor is of higher quality (higher temperature) than the Fischer-Tropsch reaction requires by a good margin, we can do so directly without first converting to electricity (which would introduce more losses.)

We now have all of our gasoline and diesel fuel, and we also have 8x the original BTU content of the coal left in thorium energy content.

We will then use the remainder to generate electricity.

So what do we have out of this?

A nuclear and physical technology that:

  • Replaces all of our gasoline and diesel fuel requirements.  This ends our foreign oil imports.  It also allows us to remove all foreign military activity related to securing that foreign oil.  It is essentially a lock that we can drop $200 billion a year off our military budget this way, and it's not unreasonable to expect that we might be able to cut the DOD in half.  Over 20 years this is at least $4 trillion in budget savings, and might be as much as double that.  Those funds should do nicely to build the plants involved.

  • Continues to use liquid hydrocarbons for light and moderate transport needs.  Sorry folks, there's nothing better.  I wish there was too.  There isn't.  Some day there might be, but that day is not today.  The problems with the alternatives are all found in thermodynamics as a consequence of energy density and those are laws, not suggestions.  The energy and money required to produce a plug-in vehicle or hybrid is, for most users, greater than the incremental cost of the fuel over the entire lifetime of the car.  Hybrid and all-electric vehicles make no sense unless you have no rational way to produce the liquid hydrocarbons.  We do have the ability using the above.

  • Reduces our carbon emissions by the amount of the former oil imports that were burned.  We still burn the gasoline and diesel, but that's in the form of the converted coal.  Since we're only using half the hydrocarbons we used before between coal and oil, our CO2 emissions go down by the amount of the formerly-burned petroleum.  I'm not an adherent of the global warming religion but if you are you have to love this plan for that reason alone.

  • Provides us dramatically more electrical power than we have now, and more-efficiently on a thermal-cycle basis.  Conventional nuclear power uses Rankine-cycle turbines.  This is one reason why they need access to large amounts of water.  Due to the higher temperature of operation these reactors can run combined-cycle generating turbines, which makes practical siting them in places where they are air-cooled yet they can still achieve reasonable thermal efficiency.

  • Is sustainable for two full centuries, even assuming our historical 1% population growth rate and no decrease in per-capita energy use.  Within 200 years we should be able to get fusion figured out.  200 years is a long time for technology to advance.  This much is absolutely certain: There is no other option that is reasonably feasible with today's technology and which has an exhaustion horizon of more than 100 years available at the present time, allowing for our historical population growth and no dramatic reductions in per-capita energy consumption.

  • Is not subject to the same constraints and risks that exist for today's reactors, even though this has nuclear power at its core.  The accident in Japan, for example, cannot occur with these units because they do not require active cooling after being shut down to remain safe.  The working fluid also tends to bind any reaction products, which inhibits the spread of any material if there is a pipe break or other release into the environment.

  • Produces much less high-level nuclear waste than conventional reactors.  Most waste is burned up in the reactor via continual reprocessing on-site.  The final waste product produced is a tiny fraction in volume of that from conventional plants.  It is not zero to be sure, but these units present a much-smaller waste profile than do traditional uranium/plutonium cycle nuclear plants.

The biggest disadvantage is that we've only built one of these reactors, at Oak Ridge, and then we stopped because a decision was made to pursue "conventional" plants due to their dual-use capability.  But the challenges presented by LFTR technology are known, and the ability to build and operate such a plant is not "pie in the sky"; we've performed all of the necessary technical parts of assembling this alternative individually and ran one of these reactors for four years.

Are their engineering challenges in this path?  Yes.  Is it "free energy"?  No.

Can this be made to work given what we know now, at a reasonably-competitive price?  YES.

If you're going to propose something else then show me the math. If you can't, then get on board, because this is the bus that will work.

Incidentally, China and India appear to have figured this out as well; I'm not the only one with a brain.

We had better lead on this or we're going to get trampled.

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Yes, I mean it.

Here's a "reprint" of my interview with Dylan Ratigan last night:

I, and FedUpUSA, ought to sue anyone using this moniker for their so-called "political affiliation" for defamation.

Yeah, that's a joke.

But so are you.

All of you.

Especially Sarah Palin, Newt Gingrich, Bob Barr, and douchebag groups such as the "Tea Party Patriots."

Let's look at their mission statement:

  • Fiscal Responsibility
  • Constitutionally Limited Government
  • Free Markets

Really?  That sounds pretty good.  But did you read "Free Markets"?

Free Markets: A free market is the economic consequence of personal liberty. The founders believed that personal and economic freedom were indivisible, as do we. Our current government's interference distorts the free market and inhibits the pursuit of individual and economic liberty. Therefore, we support a return to the free market principles on which this nation was founded and oppose government intervention into the operations of private business.

Oh, oppose government intervention eh?  You mean, you oppose stringing up the people who break the law and steal people's homes and wealth?  Private business is only private up until it rips someone off.

Notice what's missing from this mission statement and principles: Any mention of why I and others led people to mail tea bags to Congress and our President in the first place: rampant theft of over taxpayer money propping up FAILED private businesses.

Then look at what's over at TeaParty.Org: you'll find the usual pablum.  Guns, gays, God.

Heh, I like talking about Guns, Gays and God too.  Let's talk about all of them within the context of The Constitution, which is what the Tea Party was supposed to be about.  In short:

  • Guns.  What part of "shall not be infringed" didn't you bother to read?  That one's simple.  And yes, this means that under The Bill of Rights there should be no Brady Law nor any bar on a convicted felon who has served his time buying or owning a weapon!  I know what the current law says and I understand the reasoning behind it.  But you can't square it with the clear language in the Second Amendment.  Our entire system of criminal justice rests on the premise that if you are convicted of a crime and serve the time for it, your debt to society is paid.  If said convicted criminal is still dangerous to society (and thus shouldn't have a right to self-defense) why are we letting him out so he can victimize other people?  Sentences should reflect this; you should not be released until you are no longer a danger to society - period.   Prison is often debated as to whether it's about rehabilitation or punishment - I argue it is neither, it is and should be about removing those who harm others from society until they are no longer a threat to others.

  • Gays. What part of "what you do in your bedroom is none of my damn business" didn't you bother with?  You can find that in the 4th Amendment as well as elsewhere.  In terms of public space what is your private sexual preference and life doing in the public space in the first place?  200 years ago we called such people perverts and stuck them in the stocks.  You want to address this problem?  It's simple: That's a gay (or straight) person's private life and its none of anyone else's damn business what two or more consenting adults do behind a closed door on private property.

  • God.  What part of the Establishment Clause didn't you bother to read?  "Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof;"  You want prayer in the schools?  Not unless I can lead a prayer to Allah should I so choose; it is not Constitutional to favor one religion over another.  Therefore, you either keep it all out or you keep none of it out, and my preference is to keep all of it out, although I'll settle for none - either position is Constitutional.  No other position is, and that's the beginning and end of it.  The same applies to any other publicly-run and funded space.  What people do on their own private property with regard to how they worship is none of your damn business

Now that we've dispensed with Guns, Gays and God in the context of what one of the founders of the Tea Party Movement believes, I'll deal with the rest.

The Tea Party was initiated as a political protest against the unlawful and in fact unconstitutional usurpation of power from the Congress and The People in the form of extortion-led bailouts of enterprises that had engaged in acts that I, and many others, believe were at least civilly actionable and in many cases crossed the line into criminal activity.

This indictment is not limited to the nation's large banks, although it certainly starts there.  The corruption of our economic and monetary systems runs the gamut from Fannie and Freddie through their ties to Congress (including literal sexual encounters in some cases), banking interests selling trash securities to everyone from pension funds on down, judges who don't judge but rather protect monied interests on Wall Street, The Federal Reserve intentionally debasing our currency and monetizing government debt, government spending that is running 40% above revenues and much more.

In short, The Tea Party was and is about the the corruption of American Politics and the blatant and outrageous theft from all Americans that has resulted.  It is about personal responsibility and enforcement of the law against those who have robbed, financially raped and pillaged the nation.

Yet today we hear literally nothing about these issues among the so-called "Tea Party" candidates and their backers.  Sarah Palin has not said one word about locking up the banksters that brought up on the housing bubble and economic collapse.  Not one word about Bernanke's out-of-control Fed and the arguably unlawful monetization of Fannie and Freddie paper, not to mention the monetization of the Federal Debt.  Not one word about throwing judges such as this one:

in the dock - although that, ladies and gentlemen, is a statement of felony judicial corruption.  If you as an investor run into trouble with a commodity or futures trade and sue you will not get your day in court - a literal "green light" to rob the people by the big banks with official judicial sanction.  And you wonder how Hillary Clinton managed to "win" in her Cattle Futures trades eh?  Wonder no more.

Tea Party my ass.  This was nothing other than The Republican Party stealing the anger of a population that was fed up with The Republican Party's own theft of their tax money at gunpoint to bail out the robbers of Wall Street and fraudulently redirecting it back toward electing the very people who stole all the ****ing money!

You want me to support The Tea Party as it is currently constituted? 

Do all of the above, do it now, and apologize for attempting to perpetuate the financial******of this nation.

Publicize the following as your LEAD:


And finally, one more:


They caused it, they pay for it.  Period.

Until and unless you do?

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In pictures and words.

The original price action is here (top right corner of your screen); I have pulled the original Ticker and have decided the future Youtube's will be linked only through here, and that comments on Youtube itself will be disabled.

There are a number of reasons for this, not the least of which are the "it's all the Joos fault!" garbage I have to clean up on Youtube's comment area.  It's sad that people can't see the forest for the trees and have to look for a boogeyman behind every corner.

A few people also seemed to be unable to recognize the context.  Yes, the original clip appears to show blatantly improper (even unlawful) activity, and as I explain in the video above, Section 9 of the Securities Act of 1934 covers this sort of thing.

But the larger point was missed in the short five minutes (that's what I get for doing short takes, eh?) which is that it is confidence in the marketplace - that it is not just a bunch of computers fighting with one another, but rather is a valid price-discovery mechanism - that is critical to having a healthy securities market in the first place.

This confidence has been severely damaged to the point that even mainstream commentators like Cramer mention it, along with other well-respected tweeters such as this note sent to me this morning:

@tickerguy #marketticker Give it up Karl - those guys would get away with murder. Laws are not enforced, which is why it's a free-for-all.

That's a great sentiment to have about our capital markets, right?  That comment, incidentally, was in reference to this morning's article about all the "accidental" Repo-105-like transactions that are suddenly being admitted to (as the SEC looks at them), rather than having the SEC call people out.  Funny how it is that those "accidents" never are to the detriment of a firm's balance sheet posture, right?

The point is the same, however:

Confidence is all the markets have to sell to ordinary businesses - and people.

Without it the markets are departed by the "ordinary Joe":

"We just didn't want to put up with it any more," says Karen Potyk. She and her husband sold the last of their stock holdings on May 20, moving the money to bonds, certificates of deposit and bond-like annuities.

Small investors' faith in stocks, which surged in the 1990s, has collapsed since the technology-stock debacle and the Enron and WorldCom scandals of 2000-2002. The 2007-2009 financial crisis only made things worse. Now, the pullback among ordinary investors means they are a declining force in a market that is increasingly dominated by professionals.

Professionals?  Well, yeah, I suppose so.  We call a guy with a set of lock-picks a professional too, but when he's tooling around your house at 3:00 AM his title isn't usually "locksmith."

These professionals wield high-speed computers and have figured out how to, in many cases, circumvent the precise letter of the law and regulations - but not the spirit.  They operate in the shadow of what's permitted (and, I believe, well beyond it much of the time) even though the clear intent of regulations such as "Reg-FD" is to guarantee everyone an equal and fair bite at the apple.

Investors talk of a growing disillusionment with big institutions, including corporations, government, banks and political partiesas well as fears about the nation's heavy debt. Some people's confidence in stocks was seriously shaken by the volatility that returned in May. They worry that the May 6 flash crash, when the Dow Jones Industrial Average fell 700 points in eight minutes before rebounding, is a sign that ordinary people are increasingly at the mercy of anonymous companies that trade with powerful computers.

That's because they are.

If Wall Street wants to stop this, then it needs to actually stop it and quit yapping and making excuses.

Orders, for example, could be forced to be valid for two full seconds.  That is, if you expose an order in the market you have to take a genuine risk of being filled not only by those with other high-speed computers, but also by real people trading with their brain directing their keyboard and/or mouse in real time.  With a common round-trip time of ~100 milliseconds for messages nowdays on The Internet, a two-second exposure would allow human reaction time (~1.5 seconds) plus transport of the instruction to have a fighting chance against the machines.  The "fat-finger" mistake would still be able to be canceled - if it is, indeed, a fat-finger mistake.

We could, for instance, require that if you have an imbalanced pattern of orders then you need to be able to demonstrate that you were truly intending to be willing to take execution of either side.  This might be refuted rather easily if, for example, you have 100 contracts offered on the /ES at 1090, 2,000 bid at 1088, the tiny offer gets hit (and you pull the bid) and then a very short while later you show up with an opposite-side identical play.

And we could impose geometrically more-expensive fees as your percentage of cancel-to-execute rises.  First cancel, cheap.  Second, cheap.  Third with no execute, not so cheap.  Fourth, more expensive.  Tenth?  Damn expensive.  This too stops the game - now cancels aren't effectively "free" beyond one or two per order that actually matches and executes.

Of course doing these things (among others) would destroy the "near-sure thing" of picking ordinary investor's pockets via various HFT-linked schemes.  It would mean that you couldn't safely put 10,000 or 100,000 shares of orders into the system as "line standers" then cancel them as price approached.  You couldn't stick a 2,000 contract /ES order out there and cancel it a tiny fraction of a second later - if someone wanted to hit you they could do exactly that, dramatically raising the risk involved in playing this sort of game.  If the risk of losing at these games rises to a high enough level, people will stop doing it - simply because it's too dangerous.

There is nothing wrong with speculation - I do it daily. 

But there is something very wrong with a market that is rigged against the smaller investor by computers that can place 20 orders up and down the bid and offer ladder to "hold their place in line" and then cancel those they no longer want as price moves while you, sitting behind a screen, can't possibly replicate this sort of strategy - you get to stand at the end of the line of all the other shares at the same price. 

It is a documented fact that the cancel-to-execute ratio has shot the moon over the last few years.  These are not small investors issuing change orders, they are high-speed computer-driven algorithms that are "standing in line" and then quickly withdrawing their orders when they don't like the conditions, thereby reserving a trade in front of you, an (apparently legal) way to front-run order flow.  It is impossible for you, the small investor or trader, to compete in such a system as you do not have the colocated machine sitting 5' from a gigabit-level (or better) switch at the exchange itself - your terminal is connected to a brokerage, which must obtain the quotes from the exchange, disseminate them to you, then transmit back to the exchange your price order.  You, as an individual investor, are easily 100 times slower than the "arms race" folks - you can't win in such a game which is no small part of why some of these firms are able to put up "no lose" trading records.  Their "gains", if you're wondering, come from you - a fraction of a penny at a time, millions of times a day.

It's time to stop it folks.

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Oh, so the banks don't just bilk investors and rip off municipalities, they also help Mexican Gangs run drugs?

This was no isolated incident. Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

The admission came in an agreement that Charlotte, North Carolina-based Wachovia struck with federal prosecutors in March, and it sheds light on the largely undocumented role of U.S. banks in contributing to the violent drug trade that has convulsed Mexico for the past four years.

That's nice.  Guns and ammunition cost money - lots of it.  Getting that money requires some means of transporting it and "laundering" it.  For that, we turn to the largest financial institutions in the world, who, it turns out, have never been prosecuted for these felonious acts.

Wachovias blatant disregard for our banking laws gave international cocaine cartels a virtual carte blanche to finance their operations, says Jeffrey Sloman, the federal prosecutor who handled the case.

Blatant disregard?  Sounds like something you'd say at a sentencing hearing, right?  Well, no....

No big U.S. bank -- Wells Fargo included -- has ever been indicted for violating the Bank Secrecy Act or any other federal law. Instead, the Justice Department settles criminal charges by using deferred-prosecution agreements, in which a bank pays a fine and promises not to break the law again.

No Capacity to Regulate

Large banks are protected from indictments by a variant of the too-big-to-fail theory.

Indicting a big bank could trigger a mad dash by investors to dump shares and cause panic in financial markets, says Jack Blum, a U.S. Senate investigator for 14 years and a consultant to international banks and brokerage firms on money laundering.

The theory is like a get-out-of-jail-free card for big banks, Blum says.

Theres no capacity to regulate or punish them because theyre too big to be threatened with failure, Blum says. They seem to be willing to do anything that improves their bottom line, until theyre caught.


Facilitating drug-running is just one small part of it.  There's also ripping off municipal governments, such as the Jefferson County sewer deal in Alabama.  There's bid-rigging in the GIC market.  And, of course, there's laundering money for violent Mexican drug cartels, who used that money to buy automatic weapons (no, not from America - from China, Venezuela and even from corrupt Mexican law enforcement officials!) with which they then shoot civilians and government officials who refuse to be corrupted.

Oh, and it's not just Wachovia accused in this story.  It's also Western Union and Bank of America.

Workers in more than 20 Western Union offices allowed the customers to use multiple names, pass fictitious identifications and smudge their fingerprints on documents, investigators say in court records.

In all the time we did undercover operations, we never once had a bribe turned down, says Holmes, citing court affidavits.

Very impressive.

To make their criminal enterprises work, the drug cartels of Mexico need to move billions of dollars across borders. Thats how they finance the purchase of drugs, planes, weapons and safe houses, Senator Gonzalez says.

They are multinational businesses, after all, says Gonzalez, as he slowly loads his revolver at his desk in his Mexico City office. And they cannot work without a bank.


And we have a banking system that, in the United States, has insulated itself from having to obey the law or be prosecuted for violating the law by threatening the government.

Henry Paulson and Ben Bernanke in 2008, remember?  "Tanks in the streets, martial law"?

Dateline September 21, 2008

Gee, it's not enough to steal from ordinary Americans, it's not enough to rip off state and city governments, it's not enough to rig bids in the municipal bond markets, we must sit still while these institutions literally make possible funding criminal gangs that are committing murder.

There's a name for this folks.

Formally this sort of thing is supposed to be called "Operating A Continuing Criminal Enterprise", or "OCCE":

The FBI defines a criminal enterprise as a group of individuals with an identified hierarchy, or comparable structure, engaged in significant criminal activity. These organizations often engage in multiple criminal activities and have extensive supporting networks. The terms Organized Crime and Criminal Enterprise are similar and often used synonymously. However, various federal criminal statutes specifically define the elements of an enterprise that need to be proven in order to convict individuals or groups of individuals under those statutes.

The Racketeer Influenced and Corrupt Organizations (RICO) statute, or Title 18 of the United States Code, Section 1961(4), defines an enterprise as "any individual, partnership, corporation, association, or other legal entity, and any union or group of individuals associated in fact although not a legal entity."

The Continuing Criminal Enterprise statute, or Title 21 of the United States Code, Section 848(c)(2), defines a criminal enterprise as any group of six or more people, where one of the six occupies a position of organizer, a supervisory position, or any other position of management with respect to the other five, and which generates substantial income or resources, and is engaged in a continuing series of violations of subchapters I and II of Chapter 13 of Title 21 of the United States Code.


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